Question

Quantitative Problem 1: Assume today is December 31, 2013. Barrington Industries expects that its 2014 after-tax operating income [EBIT(1 – T)] will be $410 million and its 2014 depreciation expense will be $65 million. Barrington's 2014 gross capital expenditures are expected to be $110 million and the change in its net operating working capital for 2014 will be $20 million. The firm's free cash flow is expected to grow at a constant rate of 4.5% annually. Assume that its free cash flow occurs at the end of each year. The firm's weighted average cost of capital is 8.4%; the market value of the company's debt is $2.05 billion; and the company has 170 million shares of common stock outstanding. The firm has no preferred stock on its balance sheet and has no plans to use it for future capital budgeting projects. Using the corporate valuation model, what should be the company's stock price today (December 31, 2013)? Round your answer to the nearest cent. Do not round intermediate calculations.

Quantitative Problem 2: Hadley Inc. forecasts the year-end free cash flows (in millions) shown below.

Year	1	2	3	4	5
FCF	-$22.4	$37.3	$43.8	$51.6	$55.6

The weighted average cost of capital is 9%, and the FCFs are expected to continue growing at a 4% rate after Year 5. The firm has $25 million of market-value debt, but it has no preferred stock or any other outstanding claims. There are 20 million shares outstanding. What is the value of the stock price today (Year 0)? Round your answer to the nearest cent. Do not round intermediate calculations.

Answer 1

1)		2014
	NOPAT	$       410.00	million
	Add: `Depreciation	$          65.00	million
	Less: Capital expenditure	$       110.00	million
	Less: Change in NOWC	$          20.00	million
	FCFF	$       345.00	million
	Value of the firm = 345/(0.084-0.045) =	$    8,846.15	million
	Less: Debt	$    2,050.00	million
	Value of equity	$    6,796.15	million
	Number of shares	170	million
	Stock price	$          39.98
2)
	Year	0	1	2	3	4	5
	FCF		$    -22.40	$      37.30	$   43.80	$    51.60	$     55.60
	PVIF at 9%		0.91743	0.84168	0.77218	0.70843	0.64993
	PV at 9%		$     -20.55	$        31.39	$     33.82	$      36.55	$        36.14
	Sum of PV of FCFF t1 to t4	$       117.36	million
	Continuing value of FCFF = 55.6*1.04/(0.09-0.04) =						$ 1,156.48
	PV of continuing value of FCFF = 1156.48*0.64993 =	$       751.63	million
	Value of the firm	$       868.99	million
	Less: Debt	$          25.00	million
	Value of equity	$       843.99	million
	Number of shares	20	million
	Stock price	$          42.20